INTERNATIONAL ECONOMICS

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INTERNATIONAL ECONOMICS

• CLASS 7
• TARIFFS AND NON-TARIFF BARRIERS TO TRADE

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CONTENTS

• The effective rate of protection
• The effects of a tariff on consumers, producers,
  government revenue and net national gain
• Nationally optimal tariff
• Nontariff barriers to imports

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TARIFFS AND THE WORLD BENEFIT

• THE IMPOSITION OF A TARIFF
• ? the differences between home and international
  price
• ? barriers to world income maximization through
• the reduction of the world commodity production
  marginal transformation rates are no longer
  identical between countries
• non-optimal allocation of goods among consumers
  marginal substitution rates are no longer
  identical between countries

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CALCULATION OF THE EFFECTIVE RATE OF PROTECTION

• ERP(va-va)/va
• ERP effective rate of protection
• va - value added with free trade
• va value added under protection
• Value added total income intermediate
  consumption
• ERP(ti-Saji tJ)/(1- Saji)
• ti nominal tariff rate on the final product i
• aji the share of the input j in the total
  free-trade value of the final product i
• tJ nominal tariff rate on the input j

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RATE OF EFFECTIVE PROTECTION EXAMPLE 1

• 1. With free trade, the price of clothes is 100,
  and is divided into VA40, cotton input30,
  other garments (wool,...)30. The country has
  imposed 25 ad valorem tariff on the imported
  clothes, and 16,7 tariff rate on the import of
  cotton.
• What are the nominal and effective tariff rates?
• Nominal tariff rates 25 for clothes, 16,7 on
  cotton
• Effective rate of protection
• ERPC(va-va)/va(60-40)/40 50
• ERPC (ti-Saji tj)/(1- Saji) (25
  30/10016,7-30/1000)/(1- 60/100) 50

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RATE OF EFFECTIVE PROTECTION EXAMPLE 2

• 6. For the production of one unit of clothes
  Slovenian producers import wool in the value of
  80 USD. The world price of clothes (without the
  tariff) is 100 USD. Slovenia has imposed 10 ad
  valorem tariff on the imported clothes.
• What are the effective rates of protection in the
  clothing industry if nominal tariff rate on the
  imported wool is 1)5, 2)10, 3)20?
• ERP(va-va)/va
• ERP(ti-SAJi tJ)/(1- SAJi)
• In which case would domestic producers in the
  clothing industry no longer be protected?

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RATE OF EFFECTIVE PROTECTION EXAMPLE 3

• Nominal tariff rate on the imports of clocks in
  Indonesia is 12, the nominal tariff rate on the
  clock mechanisms is 12 (component). The cost
  share of the mechanism in the value of the final
  product is 20. Assume plastic is the only other
  component in the production of clocks. Which of
  the following is true
• If the weighted average (weight are shares of
  inputs in production) of nominal tariff rates
  equals that of the output (12), the ERP equals
  12
• If the weighted average (weight are shares of
  inputs in production) of nominal tariff rates
  equals that of the output (12), the clocks are
  effectively not protected
• If the share of plastics in production were 40,
  the highest nominal tariff rate on imports of
  plastic can be 30, if clocks were to be
  protected effectively
• If the nominal tariff rate on plastic was10, the
  ERP for clocks is higher than the nominal tariff
  rate on clocks
• statements a) in b) are true
• Statements b) and d) are true
• Statements a), c), and d) are true.

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RATE OF EFFECTIVE PROTECTION

• Question when no inputs (intermediate
  consumption) are used in the production of a
  final product, then the effective rate of
  protection
• equals the nominal rate of protection
• exceeds the nominal rate of protection
• is smaller than the nominal rate of protection
• Relationships between the nominal tariff rate
  (ti) and effective rate of protection (ERPi)
• Aji0 ? ERPi ti
• As ti? ? ERPi ?
• As tj ? ? ERPi ?
• If ti tj ? ERPi ti
• If ti gt tj ? ERPi gt ti
• If ti lt tj ? ERPi lt ti

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THE EFFECTS OF A TARIFF in a partial equilibrium
SMALL COUNTRY

• ASSUMPTIONS
• Partial equilibrium analysis of the effects of
  a tariff only in the market of the tariff-imposed
  commodity (ceteris paribus)
• Small country the imposition of a tariff in a
  small country does not affect the world price of
  the commodity
• The tariff is imposed ad valorem
• THE EFFECTS OF A TARIFF ON THE COMMODITY PRICE
• The imposition of a tariff causes the price of
  the imported good in the domestic market to
  increase by the amount of the tariff (PTW)
  while the world price of this commodity (PW)
  remains unchanged (small country ass.)
• PTW PW(1t) PTW the price after the
  imposition of the tariff
• PW the price in the international markets
• t- nominal tariff rate
• When a commodity, produced in the home market, is
  a perfect substitute for the imported good, then
  the home country producers can also sell the
  commodity for PWT

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• Example a small country X imposes a tariff on
  its banana imports ? the price of bananas in
  country X increases from Pw to Pwt.
• EFFECTS OF A TARIFF ON THE COUNTRYs X BANANA
  MARKET
• Consumption effect banana consumption decreases
  by GC.
• Production effect banana production increases
  by KH.
• Effect on trade (import) banana imports are
  reduced by GC KH

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THE IMPOSITION OF A TARIFF IN A SMALL COUNTRY
WELFARE EFFECTS

• Reduction of the consumers surplus area ABCF
• Increase in the producers surplus area ABKJ
• Increased government revenue area JHGF
• Redistribution effect redistribution of income
  from consumers (who are worse off) to producers
  and government (who benefit from the tariff).
• ___________________________________________
• NET NATIONAL LOSS FROM A TARIFF KHJ GCF
• KHJ production-side loss from tariff
  (non-optimal allocation of production factors)
• GCF consumption-side loss from tariff
  (non-optimal consumption decisions)

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THE IMPOSITION OF A QUOTA IN A SMALL COUNTRY
WELFARE EFFECTS

• Reduction of the consumers surplus area ABCF
• Increase in the producers surplus area ABKJ
• Increased government revenue -----
• Revenue of importers
• area HGFJ
• ___________________________________________
• NET NATIONAL LOSS FROM A TARIFF KHJ GCF
• KHJ production-side loss from tariff
  (non-optimal allocation of production factors)
• GCF consumption-side loss from tariff
  (non-optimal consumption decisions)

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PARTIAL EQUILIBRIUM ANALYSIS OF THE EFFECTS OF A
TARIFF IN A SMALL COUNTRY an example

• Data on demand and supply of lamps in the USA
• D140-20P
• S20P-20
• Design a graph and determine the equilibrium
  autarky price of lamps. The free trade price of
  lamps in the international market is 2.
• What would be the consumption, production and
  trade effects of the imposition of 50 ad valorem
  tariff?
• Which factors determine the size of these
  effects? (the difference in prices (Pw and Pwt)
  and price elasticities of supply and demand in
  the home countrys market)
• How would the tariff affect consumers and
  producers surplus, govt revenue and what is the
  size of the net national loss from the tariff?
• What would be the cons., prod., trade and govt
  revenue effects of the imposition of a import
  quota of 40 lamps? Who gets the income effect?
• Which import barrier is stricter tariff or
  quota?

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PARTIAL EQUILIBRIUM ANALYSIS OF THE EFFECTS OF A
VER IN A SMALL COUNTRY

• Data on demand and supply of lamps in the USA
• D140-20P
• S20P-20
• Design a graph and determine the equilibrium
  autarky price of lamps. The free trade price of
  lamps in the international market is 2.
• What would be the consumption, production and
  trade effects of the imposition of 20 unit
  voluntary export restraint?
• How would the VER affect consumers and producers
  surplus, government revenue and what is the size
  of the net national loss from the tariff?

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• Question
• Domestic firms in a footwear industry are
  lobbying for imposition of a quota. They
  emphasize that imposition of a quota would not
  increase the costs of selling imported shoes and
  therefore the price in domestic market would not
  increase.
• Do you agree with this argumentation?

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THE EFFECTS OF A TARIFF in a partial equilibrium
LARGE COUNTRY

• Large country its imports of certain
  commodities are large enough that the imposition
  of a tariff by this country can affect the
  international price of this commodity
• THE EFFECTS OF A TARIFF ON PRICES
• The imposition of a tariff on imports of
  commodity A reduces the large countrys imports
  of this commodity in the amount that is large
  enough to cause a reduction in the world price of
  commodity A below its free trade level
• PW lt PW
• ? the home price increase after tariff imposition
  is smaller than the tariff rate would induce ?
  the cost of the tariff is not entirely born by
  the tariff-imposing country (large country), as
  it was the case of a small country PWT lt PWT

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• Large country imposes a tariff on its imports of
  commodity X ? world price decreases to P'W
• The EFFECTS OF A TARIFF IN A LARGE Vs SMALL
  COUNTRY
• Production, consumption, import effects, net
  national loss SMALLER than in the small country
  case
• Government revenue effect EFIJ

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• LARGE COUNTRY WELFARE EFFECTS OF A TARIFF
• Decrease in consumers surplus KLBJ (smaller
  than in a small country)
• Increase in producers surplus KLAI (smaller
  than in a small country)
• Increased govt revenues IEFJ
• Part of the tariff cost is born by domestic
  consumers (IGHJ)
• Part of the cost is born by foreign exporters,
  who had to reduce the price of A, to prevent the
  fall in their export sales (CE'F'D GEFH) ?
  large country can transfer part of a tariff cost
  to the exporting country (foreign exporters) ?
  GAINS FROM TERMS OF TRADE EFFECT (increased TOT)
• ? Deadweight efficiency loss AGI HBJ (smaller
  than in small country)
• __________________________________________________
  _______________________________________________
• NET EFFECT ON THE WELFARE CE'F'D (AGI HBJ)
• LARGE COUNTRY CAN EVEN GAIN FROM IMPOSING A
  TARIFF, IF
• AGI HBJ lt CE'F'D if gains from higher TOT gt
  deadweight loss

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PARTIAL EQUILIBRIUM ANALYSIS OF THE EFFECTS OF A
TARIFF IN A LARGE COUNTRY example 1

• A large country A has the following demand
  supply functions for furniture
• S 2P- 2 and D -2P30
• The free trade price of furniture in the
  international market is 5 EUR. A large country
  decides to impose a 50 ad-valorem tariff on the
  imports of furniture. Due to imposition of this
  tariff the price in the world market drops to 4
  EUR. Within the partial-equilibrium framework
  determine the consumption, production, trade and
  govt revenue effects of the tariff in the
  country A. How does the tariff affect welfare in
  country A?

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• THE OPTIMAL TARIFF (1/price elasticity of
  foreign supply of the large country imports)
  the tariff rate that creates the largest net gain
  for the country imposing it.
• Conditions for a successful imposition of an
  optimal tariff
• a large enough country
• the tariff imposing countrys trading partners do
  not react by imposing countervailing duties.

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PARTIAL EQUILIBRIUM ANALYSIS OF THE EFFECTS OF A
TARIFF IN A LARGE COUNTRY example 2

• 2. The U.S. and GB are trading with wheat. The
  autarky equilibrium price in the U.S. is equal to
  6 for a kg of wheat (In this case the U.S.
  produces and consumes 60 kg of wheat). The
  autarky equilibrium price in GB is equal to 3
  for a kg of wheat (in this case GB produces and
  consumes 60 kg of wheat). With free trade and
  without transportation costs the world
  equilibrium price is equal to 4.5 . At this free
  trade price the U.S. imports 60 kg of wheat, and
  GB exports 60 kg of wheat and the domestic
  quantities supplied and demanded are the
  following SGB 80 kg, DGB 20 kg, SUSA 25 kg,
  DUSA 85 kg. Lets suppose that U.S. imposes a
  specific tariff of 1 USD for a kg of wheat.
• What will be the price of wheat in the U.S. and
  GB after the imposition of a tariff? How much
  wheat will U.S. import and how much will GB
  export?
• What would happen if the export supply curve of
  GB would be infinitely elastic at price 4.5 ?